Combo store gold standard is pharmacy's model

Drug Store News, August 18, 2003

Kroger Co., the nation's largest conventional grocery chain, also is tops in pharmacy volume, ringing up $5.1 billion in prescription sales last year--close to 10 percent of its 2002 volume of $51.8 billion.

And as it continues to add pharmacies at Ralphs Grocery Co. in California, the numbers will continue to increase.

Kroger operates pharmacies at 1,795 locations, or 72 percent of its 2,488-store base. The percent age is much higher in the Midwest, observers pointed out, but Kroger's acquisition in 1999 of several Western supermarkets, including Ralphs, brought the chainwide percentage down. However, Kroger is in the process of installing pharmacies in the majority of acquired stores that lacked them.

Industry observers give Kroger pharmacies high marks. "Kroger has long been the gold standard of supermarket-pharmacies because shoppers identify it as a pharmacy destination," said Gary Giblen, senior vice president and director of research at C.L. King Associates of New York.

According to Jim Wisner, principal at Wisner Retail Marketing of Libertyville, Ill., "Kroger has been at it a lot longer than anyone else, having been among the first in the supermarket industry to open combination stores and having once operated its own drug store chain, and it tends to get pretty good per-store volume in the pharmacy."

In addition, Kroger has established a strong relationship over the years between its in-store pharmacies and the rest of the store, Wisner pointed out, going so far as to hold seminars for its produce managers, for example, to raise their consciousness about their link to the pharmacy customer, he said.

Chuck Cerankosky, an equity analyst with McDonald Investments in Cleveland, said Kroger's pharmacies benefit from strong over-the-counter business in Kroger brands that it's developed over the years. "That builds credibility with customers," he said.

"In addition, Kroger does a better job in pharmacy than most supermarkets other than Jewel-Osco because it got in early and developed a prescription business, and that helped Kroger build loyalty between pharmacy customers and individual stores," Cerankosky said. "When you've established so much credibility for 15 or 20 years, the likelihood is good you'll do a decent pharmacy business. As a result, even as CVS, Walgreens, Rite Aid and Eckerd have built new stores over the last few years, it's been difficult for them to take that business away from established [supermarket] pharmacies like Kroger."

Wisner agreed. "While the majority of freestanding drug store operators were expanding to street corner locations over the last five or six years, Kroger was already there," he said. "Kroger as given pharmacy such a mainstream position in the stores for so long that customers automatically think of Kroger as a pharmacy destination."

According to Meredith Adler, an equity analyst with Lehman Brothers, New York, Kroger's pharmacy sales are profitable, unlike many other supermarket pharmacies. "Pharmacy customers are good, loyal shoppers, and the profitability of Kroger's pharmacies is based on the amount of overall volume the company does," she explained.

Kroger said its pharmacies filled approximately 111 million prescriptions last year, with a growing number of customers transmitting prescription requests via the chain's online EasyFill system; it also reported that online prescription volume nearly doubled in 2002.

7. KROGER AT A GLANCE

2002 *      2001 *     2002 % of    No. of stores **     % of stores
Rx sales   Rx sales   total sales   with pharmacies    with pharmacies

$4,658      $4,500       9.0%            1,795               72%

Source: Chain Store Guide/Drug Store News * Sales in millions
** As of April 2003